Q.(a) Explain the Keynesian Theory of Interest.

(a) Keynes's liquidity-preference theory treats interest as the reward for giving up liquidity; the rate is set where the demand for money (transactions + precautionary + speculative) equals the supply of money. (b) ICT in Economics means using computers, the internet, databases and statistical/econometric software for collecting, analysing, modelling and presenting economic data.

(a) Keynesian Theory of Interest (Liquidity-Preference Theory)

J. M. Keynes put forward the Liquidity-Preference theory of interest.

1. Interest as a monetary reward. Keynes held that interest is the reward for parting with liquidity for a specified period — i.e., for giving up the convenience of holding cash. It is a purely monetary phenomenon, determined in the money market (not by real factors like saving and investment as in the classical view).
2. Demand for money (Liquidity Preference). People prefer to hold money in cash for three motives:
   • Transactions motive — to meet regular day-to-day payments (depends on income);
   • Precautionary motive — to meet unexpected needs (depends on income);
   • Speculative motive — to gain from expected changes in interest rates/bond prices (varies inversely with the rate of interest).
3. Supply of money. The total supply of money is fixed by the monetary authority (the central bank) at a given time.
4. Determination of the rate of interest. The equilibrium rate of interest is fixed at the point where the demand for money (liquidity preference) equals the supply of money. A rise in the money supply (demand constant) lowers the interest rate, and a rise in liquidity preference (supply constant) raises it.

(b) ICT ideas used in Economics

Information and Communication Technology (ICT) has become an important tool in the study and practice of Economics. The main ideas/uses are:

1. Computers and software. Used for storing, processing and analysing large volumes of economic data using packages like MS Excel, SPSS and econometric software.
2. The Internet and databases. Provide quick access to economic data, reports and research from sources such as the RBI, government departments and international agencies. …